Are ADUs in the Denver Metro area worth it?

[Jesse Englund-Rohlf]

Hey  Fellow Denver investors! 

I'm thinking about putting an ADU on a future single family home as part of my wife & I's house hack strategy. Has anybody out there successfully pulled one off? I've heard that the permitting process was getting easier but we're probably going to avoid Denver & Boulder counties and target either Westminster, Broomfield, JeffCo or Adams. What does that permitting/build timeline & process look like? Can you finance an ADU? Is there a good forced equity bump on the property once completed? Looking for any advice or cautionary tales from people's experience.

Thanks!

-Jesse

[Chris Davidson]

@Jesse Englund-Rohlf not sure about the areas or permitting, but for sure know if you haven't bought yet the quickest way is to buy one with a ADU already there. Building opens up more issues than just buying as timeline is extended and more variables are present.

You can finance an ADU, the equity bump isn't going to appraise as much as market would likely deliver. Unless you find the perfect house (which there isn't) I would just look for a property with a ADU already or at least the structure if you really want to "add" value.

Best of luck and way to plan ahead!

[Tanner Pile]

@Jesse Englund-Rohlf 

ADU's will add value to the property. I would look at comps for the area you're targeting and see what previously sold SFHs with ADU's are going for. I have several friends that have done this in Colorado Springs and Denver. A build price of $100k can be expected. I've seen quotes for Denver property ADU's up to $250k for a dirt start.

Also, make sure you have the correct zoning to all ow for an ADU to be built. Each County will have different zoning definitions but you will need to make sure it allows for multi-family properties (2 units or more).

Timeline can range depending on what all needs to be done. I like to look for properties with 2 car garages so you are already a step ahead for construction. I would expect 6-9 months with an already existing structure. If not over a year is likely. The permit process will delay this as well as they will need to come and check everything at certain stages of the build. 

Good Luck!

[Tanner Pile]

@Jesse Englund-Rohlf

Also, I believe in this current market it is easier to get the appraised value you're looking compared to selling it at that price. Meaning the sale price will likely be lower with a higher appraised value. This will not last for long as more property sales happen that are lower in value compared to last year. 

It is hard for appraisers to find comps for house and cottage (ADU) properties sometimes so they will need to go farther back in time to find similar comps, which will be when the market was at a peak.

They will make market adjustments but if you present them with a packet before the appraisal with your comps and why you believe it will be xxx price they are likely to get you that price if your data supports it.  

[Stacy Rozansky]

Hi Jesse,

Ultimately, as with most things it depends! Determining if an ADU is worth it will really depend on your strategy and goals as an investor. Staying outside of Denver should increase your chances of permits getting issued faster. Financing an ADU at the same time as a purchase would probably look like a renovation loan. I can connect you with some lenders that may be able to offer some better information on that.

The best advice I have gotten is to pay an appraiser take a look at your plans and estimated costs before you start, to see if they think it will appraise at what you are expecting. Zoning will be an important factor in your search as well. 

Overall right now it is the time and expense that is keeping people away, but for the long term I think it will be a good investment. 

[Matt M.]

Quote from @Jesse Englund-Rohlf:

Hey  Fellow Denver investors! 

Juice isn't worth the squeeze unless you are in it for a LONG hold. $250k+ 

[Ben Rhodin]

Hey @Jesse Englund-Rohlf!

You aren't the only person asking this question. In short, my answer to this question is... if you have the capital it is better to put it to work in a new property, instead of building an ADU. This is due to a couple of reasons that others have already expressed here.

1. ADUs are very expensive, and most of the time very tough to finance. You will need to either use a LOC, or a construction loan to build it, which have short terms and high interest.

2. They take a long time to complete. In most of the Denver Metro Area, I would assume at least 1 year+ if not 2 years to complete a stand-alone unit.

3. Refinancing out of the construction or other loan on the back end may prove difficult, as ADUs are not widespread in the Denver Metro yet, so appraisers are not very confident in appraising them. So you may find yourself in a pickle when you can't refinance your current debt on it. I have heard stories of appraisers not valuing ADUs at all, valuing them the same as a garage. Unless you have some solid comps, they will most likely always botch it.

My main opinion with them is why dump all your time and money into a project that won't produce for a year or two, when you could leverage more of your capital and get either a new primary with an existing ADU, or simply a new investment property (maybe a small multifamily) that will be ready to go on day one, and hopefully produce some cashflow. But also, you gain all the additional tax benefits, loan paydown, and appreciation on that property that you wont get on the ADU, and you don't have to wait two years for it.